Is There a Method to the Badness?

Not all market strategists are created equal.

MINYANVILLE ORIGINAL This past week may have seemed full of your typical summer do-nothing, low-volume trading sessions. But in reality, it was a microcosm of what has been driving price action since the 2008 financial crisis abated.

The preceding Friday, the S&P 500 (^GSPC) closed at 1418, which was the highest weekly close of the year and of the bull cycle. Entering this past week, it seemed as if the market was poised to break out and challenge the 1422 intraday high that had been reached on April 2. With the backdrop of weak economic data, weak Q2 earnings growth, a Fed prepared to launch another round of stimulus, record low interest rates, European turmoil, and overall doom and gloom, the market continued to defy skeptics.

The 13% rally in the Standard & Poor's 500 Index has lifted the gauge to its highest level ever compared with strategists' forecasts, a sign the best may be over for US equities in 2012. Shares have climbed 2.1% above the average projection of 1,389 from 13 firms from Morgan Stanley (MS) to JPMorgan Chase & Co. (JPM) tracked by Bloomberg. That's the biggest premium on record for this time of year, according to data going back to 1999. Estimates by strategists in August have come true the last three years, with the S&P 500 rising 11% on average through December, the data show.

It was an interesting data point, but I wasn't really focused on the fact that it signaled an end to the rally -- rather that it was yet another example that Wall Street was still skeptical and cautious. I didn't think much more of the article until later that afternoon when I received an email from a friend. This email stated that Minyanville contributor and Raymond James strategist Jeff Saut had called for the S&P to break out and challenge 1500. Then I learned that JPMorgan's Thomas Lee had similarly noted the 1500 level.

My Twitter stream was suddenly lighting up with calls for break-outs and melt ups.

Whoa, whoa, whoa... Get a hold of yourself.

I'm not saying these breakout bulls are wrong; in fact, I have been in this camp for some time. But when you start to hear elevated break out chatter before it happens, you have to believe that the market is potentially already positioned for such an event, which usually means it's susceptible to a head fake. On Monday night, I Tweeted a post from my blog titled "Late to the Party" with a short note of warning:

the calls for a breakout in stocks and talk of 1500 price targets are getting a little loud for this old contrarian. I still think we make a move higher but we are likely not sustaining a breakout from these levels with momo indicators on the ceiling. In fact as much as we think the market sees higher prices the better r/r set up from these levels is from the short side.

it wouldn't surprise us to see a gap above the 1420 level that runs stops and capitulates the late holdouts only to reverse in their face. I think we need to see momo on the floor prior to launching a breakout and with the Jackson Hole symposium in two weeks there is no reason to pile on now.